Upping the Ante on Nevada Gambling: Will the Legislature Approve a Lottery?

February 3, 2005

Alicia Hansen

Alicia Hansen

When the state legislature reconvenes next week, legislators will have their hands full. Over 1,000 bill drafts are on the docket for the 73rd Regular Session. Eight of them concern gambling, and the most surprising is Bill Draft Request #141, which legislators will take up this session. It would create a state-run lottery in a state where private gambling is king.

Of course, the casino industry will oppose the legislation, and they’ll quite rightly point out that a lottery would raise paltry sums compared to the $776 million Nevada raked in from casino taxes in 2003. In nearby New Mexico, which has a comparable population, the lottery brought only $33 million into state coffers in 2003 — one-twentieth the amount raised from casinos.

Let’s hope that when legislators debate the lottery bill, they remember that they are not considering just another piece of gambling legislation. A lottery is fundamentally different from private gambling. It is a state-run monopoly and, more importantly, a tax.

State governments kept almost $14 billion, or 31 percent, of the nearly $45 billion spent on lotteries in Fiscal Year 2003. They did not consider this money to be tax revenue, but they should have. The money left over after lottery agencies pay winners and operating costs (the “profit”) is actually an implicit tax.

Many people believe the lottery can’t be a tax because a tax is mandatory and playing the lottery is voluntary. But they’re confusing the purchase with the payment. The ticket purchase is voluntary, but the payment of the tax is mandatory. It’s like buying alcohol in a state-run liquor store. The state levies excise taxes on alcohol and, although the purchase of alcohol is voluntary, those taxes are mandatory. With both alcohol and lotteries, the state prohibits the private sale of a product, creates a monopoly for itself and taxes the product.

Does it really matter whether the lottery is a tax? Absolutely. Lotteries are simply poor tax policy, for several reasons.

First, good tax policy requires taxes that are transparent, or clear to taxpayers. Taxpayers should understand what is being taxed and at what rate. Lottery retailers do not give customers receipts itemizing the tax, and since states advertise the lottery as a recreational activity rather than as a revenue-raising activity, consumers may be unaware of the implicit tax rate.

Second, lotteries are regressive, meaning low-income Nevadans will be spending more on the lottery as a percentage of their income, usually buying tickets along with milk at the local convenience store. Casino patrons, on the other hand, tend to be wealthier and often travel from other states. Should the government be in the business of selling, advertising and taxing a product on which the poor spend more and bear a disproportionately large share of the tax burden?

Finally, the proposed use of the Nevada lottery revenue—to lower senior citizens’ property taxes—is problematic for three reasons.

First, although the lottery proponents are trying to make it sound noble by “helping senior citizens,” it would still be a transfer of money from lottery players, many of whom are poor, to property owners.

Second, it would be more fair and efficient to simply lower property tax rates for everyone. If legislators truly believe they cannot afford to lose any tax revenue, they should raise taxes that apply to everyone, such as the sales tax or the new wage tax. Raising those taxes would not be good for the state’s economy, but at least it would be an honest tax hike and preferable to a lottery.

Third, the property tax reduction may not be as large as legislators expect: in Wisconsin, where lottery funds are used to lower property taxes, lottery revenue in FY 2002 comprised a meager two percent of state and local property tax revenue.

Nevada is one of only ten states without a lottery. That number will soon fall to nine since Oklahoma voters have approved one. The reason Nevada is still part of this small group probably has something to do with the state’s large private gambling industry, but there are other, more important, reasons legislators should be wary when debating the lottery bill. A lottery makes a state tax system more regressive, less neutral and less transparent—in general, less principled.

Alicia Hansen is staff writer at the Tax Foundation in Washington, D.C. and author of “Lotteries and State Fiscal Policy.”

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